RPT-Global firms look past India weakness, bet on spending power

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Last Updated: Thu, May 16, 2013 03:10 hrs

By Tony Munroe and Rajesh Kumar Singh

MUMBAI/NEW DELHI, May 16 (Reuters) - Global companies
betting on India's potential as a consumer market are looking
beyond the worst patch in a decade for Asia's third-largest
economy and investing billions of dollars in the country.

In the biggest recent deal, Unilever is
spending up to $5.4 billion to lift its stake in its Indian
subsidiary, Hindustan Unilever, the country's largest
consumer goods maker.

Inbound M&A into India totals $9.86 billion this year, the
highest in Asia, Thomson Reuters data shows, pointing to growing
confidence among overseas firms in the potential of a 1.2
billion-strong consumer market.

"India as a country is under-consumed. That is changing,"
said Amitabh Mall, a partner at the Boston Consulting Group.

For now, however, an economy in the doldrums is poised for
only sluggish recovery. While long-crippling inflation is
finally easing, a general election due next year and fractious
parliamentary politics have stalled many economic reforms.

In 2012, foreign direct investment into India dipped about 7
percent to $29.3 billion. By comparison, FDI into China saw a
decline of about 10 percent, but it attracted $111.6 billion.

Overall capital investment in India is likely to have risen
just 2.5 percent in the last April-March fiscal year, down from
14 percent two years earlier, and there is little of the
desperately-needed investment in infrastructure, which would
ease inflationary bottlenecks and also stimulate growth.

In the consumer sector, despite the long-term attractiveness
of India, demand remains weak.

P. Balendran, vice president of General Motors Co
India, expects industry-wide car sales in India to fall 2 or 3
percent in the fiscal year that started in April, slightly
better than the 7 percent drop in the most recent year but a far
cry from the 30 percent growth of three years ago.

"The market is absolutely sluggish. We don't expect sales to
pick up any time before the festive season," he said, referring
to the holidays that begin around October.

A slow economy and high inflation have crimped spending not
just on big-ticket goods like cars but also discretionary items.
Jubilant Foodworks, the franchise owner for Domino's
Pizza and Dunkin' Donuts, said same-store sales in the March
quarter grew 7.7 percent, down from 26.3 percent a year earlier.

GREEN SHOOTS?

On the bright side, the Indian economy has bottomed,
although the central bank's expectation that it will grow 5.7
percent this fiscal year, up from 5 percent the previous year,
is a grim outlook for a country that aspires to double-digits.

Bankers and fund managers say private equity investment in
Indian infrastructure could pick up, leading to better prospects
for growth.

Since taking office last July, Finance Minister P.
Chidambaram has championed reforms and hit the road to woo
investors in Asia, Europe and North America.

"There's a perception that the government is no longer in
denial as far as the economic reality of India is concerned and
is trying to take some steps to correct that," said Sonal Varma,
an economist at Nomura in Mumbai.

Despite the slump, consumer spending in India is on track to
rise from nearly $1 trillion in 2010 to $3.6 trillion in 2020,
or annual growth of 14 percent, said Mall at Boston Consulting,
faster than the global average of 5.5 percent and the 9 percent
average expected for emerging economies over the same period.

Overseas companies are especially ardent thanks to cheap
capital, whereas Indian companies are held back by high domestic
interest rates. Also, for global companies, India offers better
growth prospects than they have at home.

Meanwhile, some of Chidambaram's efforts are bearing fruit.

Recent investment plans like Malaysia-listed AirAsia's
formation of an Indian airline with the Tata group and
Swedish furniture giant IKEA's $2 billion store
roll-out projected over 15 to 20 years are the direct result of
reforms made last year in the aviation and retail industries.

Gulf state Qatar recently bought a 5 percent stake in Bharti
Airtel Ltd for $1.26 billion despite 13 straight
quarters of falling profits for India's biggest telecoms
carrier, as subscriber growth and usage trends suggest the worst
may be over for one of India's most beaten-down industries.

Still, India's signature reform of 2012, allowing in foreign
supermarket chains such as Wal-Mart Stores Inc, has yet
to find takers. Operators are seeking clarification on sourcing
and infrastructure rules, and none has applied to enter.

Further reforms, such as a push to increase the limits on
foreign ownership in insurance and a land reform bill, stalled
when the latest parliamentary session ended early amid noisy
political acrimony.

A national election due by May 2014 means the window for
Chidambaram to enact more of his agenda is narrowing.

A key deterrent to more investment is often-unpredictable
tax treatment of foreign companies in India.

A year ago, corporate investors were horrified by India's
efforts to impose a $2 billion-plus retrospective tax on
Vodafone even after the highest court ruled in favour of
the mobile carrier. While Chidambaram has said he wants the
matter resolved, the dispute drags on.